Global seaborne trade has nearly doubled since the turn of the century and in the consensus view, looks likely to continue on an upwards path in the long term. One important element of this trend is rising per capita trade as the world becomes wealthier. But where, exactly, might further per capita seaborne trade growth come from? The concept of an economic ‘tipping point’ and a few examples can be helpful here.

The Wall Street Crash in 1929 marked the onset of the Great Depression in the US. Times were tough, but jazz music, which had taken off in the 1920s, endured and evolved into the era of big bands and swing music now synonymous with the 1930s. The crude tanker sector is having a tricky time of its own at present, but over the last decade, crude trade patterns have seen their own evolutionary swing…

The car carrier sector has been yet another part of the shipping industry to have faced challenging conditions this year. The focus has largely been on demand side difficulties, with growth in global seaborne car trade appearing to have gone into reverse gear. It has been a rather bumpy ride, and today’s car carrier market indicators still seem to be flashing up plenty of warning signals.

Going Slow

Growth in global seaborne car trade has struggled to return to the robust levels seen prior to the global economic downturn, when car trade was one of the faster growing parts of seaborne trade. Given the strong link between economic growth, consumer demand and car sales, the car carrier sector has been highly exposed to sluggish world economic performance in recent years, and global seaborne car trade has still not yet returned to its 2008 peak of 21.3m cars, with average growth of just 1.4% p.a. in 2013-15. This year has seen further pressure on seaborne volumes, with car trade projected to have dropped 4% to 19.8m cars.

The key driver of this fall has been considerably lower imports into developing economies following the commodity price downturn. Car sales in these countries have dropped sharply, and seaborne car imports into the Middle East, Africa and South America are set to drop by more than 10% this year. While imports into North America and Europe, still the two largest markets for imported vehicles, have grown moderately (by 2% and 4% respectively), this has not been enough to offset declines elsewhere. Other factors have also dented volumes, with expansion of car output closer to demand centres leading to a disconnect between global car sales, which have continued to expand, and seaborne trade volumes.

Warning Lights

Largely as a result of the downturn in demand, car carrier market conditions have deteriorated further this year. Most car carriers still operate under long-term agreements, but guideline charter rates have fallen back to subdued levels, with the one year rate for a 6,500 ceu PCTC falling to $16,000/day in recent weeks, down 30% from the start of the year. Vessel idling has risen, utilisation of active capacity is under pressure, and waiting time between fixtures has increased, whilst a trend towards shorter-term and spot fixtures has also been apparent.

Making The Turn

In response to these pressures, owners have stepped up supply-side action. Scrapping has increased, and is projected to reach 0.2m car equivalent capacity this year, over four times the 2015 level and the highest since 2009, with fleet capacity projected to have declined by 0.3% in full year 2016. Meanwhile, only two ships have been ordered this year, after 42 contracts were placed in 2015.

Route Planning

Yet the road ahead still seems far from clear for the car carrier sector, with demand seeming unlikely to shift up a few gears in the short-term. In our annual Car Carrier Trade & Transport report, we look at the latest trends in detail. This year’s report is now available on the Shipping Intelligence Network. Have a nice day.

This week, the Bank of England put into place its action plan following the UK referendum on 23rd June, which indicated the British population’s preference to leave the European Union. While the political dust has yet to settle, shipping market observers have had time to form their views on the impact of ‘c’ on the industry. This week’s Analysis attempts to put the UK and the EU’s role in shipping in context.

Holding On

Once upon a time, of course, Britannia ‘ruled the waves’ and Great Britain, with its colossal maritime heritage (remember the British Empire?) was one of the world’s leading lights in ship ownership and shipbuilding. Today the story is a little different. UK owners account for just 2% of the global fleet in GT terms. The EU as a whole, however, remains a significant player, with 36% of world tonnage. While market share has shifted to the Asia-Pacific (39%), EU owners have held their own, led by the world’s largest owner nation in Greece, which has not been subject to its own ‘Grexit’ just yet.

Sailed East

Historically, Europeans were leading shipbuilders too, but in the modern era shipbuilding is dominated by Asia. In 2015, EU builders took 1.9m CGT of new orders (over 1,000 GT), 5% of the global total, and today account for 8% of the orderbook in CGT, whilst China, Korea and Japan together account for 84%. Europeans are now largely builders in the niche markets, dominating the cruise sector and maintaining a focus on small ships. Within the EU, the UK’s contribution is limited, with just two merchant vessels over 1,000 GT built since 2011.

Big Bloc

In terms of trade, the UK, given its status as the world’s 5th largest economy, accounts for a significant volume of imports and exports. However, in a global context these account for a relatively modest share. The UK’s imports account for an estimated 2% of global seaborne trade and its exports 1%. The EU, meanwhile, is much more significant, as befits its role as the world’s largest trading bloc, accounting for an estimated 16% of seaborne imports and 12% of exports.

Service Culture

One area where the UK and Europe maintain importance is as service providers. The UK is the world’s 14th largest flag and EU flags account for 18% of world tonnage. Lloyd’s Register in the UK is still a leading class society and along with DNV-GL and BV, the EU’s heavy-hitters, class 44% of the world fleet. Furthermore, London still remains one of the world’s pre-eminent maritime business hubs at the forefront of legal services, insurance and shipbroking too!

Wider, Still & Wider

However ‘Brexit’ plays out, it won’t go without notice. In fleet ownership or trade terms, the UK alone is not so significant (though the EU as a whole is). Perhaps the more important impact might be the wider fallout of uncertainty (or worse) surrounding one of the world’s largest economies. Meanwhile, the UK will be hoping that London can retain its role at the centre of commercial maritime affairs. Leaver or Remainer, have a nice day.

New Zealand’s Rugby World Cup victory has further cemented the now long-held dominance of the All Blacks in international rugby. But the performance of the European nations in this year’s World Cup was disappointing, and over the long-term in shipping too, focus has gradually shifted from Europe to the other side of the world, with Asia the increasingly dominant player in many parts of the maritime industry.

Another Round Kicks Off

The rise of Asia and especially China as key drivers of seaborne trade growth has over recent decades turned maritime eyes increasingly eastwards. Across many aspects of the shipping industry, Asia has consistently been moving up the league tables, but having slipped behind in the game, how does Europe’s position look now?

A look at overall economic performance suggests not. EU GDP growth is certainly improving after falling to -0.4% in 2012 (see graph), partly owing to low oil prices and the weak euro. But this recovery is far from convincing – growth is expected to remain below 2% this year. As a team performance, the overall impression of regional growth is one of distinct patchiness, with a weak showing in Greece and in countries exposed to difficulties in Russia partly offsetting improved displays in others such as France, Italy and Spain.

Trade Struggles To Convert

The implication of these trends on seaborne trade is similarly mixed. After notably firmer volumes in 2014, European container imports have slowed in the year to date, with volumes on the Far East-Europe route down 5%. Imports even into countries showing improved economic growth this year have declined. Asia remains the focus of box trade expansion, with Europe’s share of global imports set to fall below 14% this year.

In the dry bulk sector, China’s leap up the leaderboard has squeezed the share of EU imports in global iron ore and coal trade to 12% last year. China’s dry bulk imports are now coming under pressure, but the EU has been unable to claw back lost ground. However, in the crude oil trade, Europe has stubbornly stayed in the game, keeping a share of around 24% in global crude trade since 2010. With EU imports set to grow 8% this year, 2015 could see the EU drive a greater share of crude trade growth than China for only the second time since 2005.

Tackling The Leader

Moreover, an apparent bounce-back is currently being seen in fleet ownership. Asia’s rapidly growing fleet had reduced the share of EU owners in the world fleet to 35.5% in 2013 (see inset graph). However, a 15% expansion in the Greek-owned fleet since start 2014 has helped the EU to begin to even out the scoreline, and the EU’s share of the world fleet is now rising for the first time since 2008.

But No Turnover

So, some elements of European shipping now seem to be driving forward. But economic difficulties linger on, and in reality improvements have generally been only limited in scope. For now, just as the All Blacks must be feeling secure at the top, in the world of shipping Team Asia still seems well ahead of the European pack.

Following several years of a more cautious approach to ordering, it appears that we have entered a new phase of cruise ship investment. This summer’s activity has lifted the cruise orderbook to record levels, and the sector is hoping to take advantage of the mobility of its assets to tap the enormous potential in emerging markets.

Looking Up…

The cruise industry today appears to have once again entered a phase of rapid growth. Since the start of last year we have recorded 24 firm orders for new vessels, including 15 with capacity in excess of 3,000 passenger berths. The orderbook now consists of 41 vessels with a combined berth capacity of 120,664, equivalent to 25% of the current fleet. In the 3,000+ berth sector the orderbook is equivalent to 73% of the current fleet.

A continued focus on “mega” cruise ships is evident from the orders noted so far this year. Royal Caribbean has ordered another Quantum-Class, 4,200 passenger ship for delivery in 2019. Elsewhere, Carnival Corporation has firmed the first four of a previously announced plan for a nine-ship order. These will be the largest ships contracted by Carnival at 180,000 GT, and while not as large as the Royal Caribbean Oasis-Class ships (225,000 GT), they will have a higher total passenger capacity (6,600), giving Carnival at least a claim to having the largest cruise ships afloat.

Looking Back…

In the past 20 years we have seen three distinct phases of expansion, with the orderbook exceeding 100,000 berths in early 2001, in 2007-08 and again in 2015. The two previous peaks were followed by a sharp drop as investment in new vessels was abruptly cut off by economic slowdown in the established key markets in North America and Europe. What factors will determine whether the current phase is similarly short-lived or a more sustained phase of investment?

Looking East…

In the short-term the performance of the cruise sector will remain closely linked to that of the major “western” economies. Last year North American and European passengers accounted for 55% and 29% of the global market of 22 million respectively; these markets will continue to exert an important influence. However, the outlook may be shaped by developments further east. Thus far, relatively few of Asia’s rapidly growing middle class have been exposed to cruises, but the cruise lines believe they can develop significant demand growth in this region. In 2015 the number of mainland Chinese tourists cruising is expected to pass 1 million for the first time, and according to industry sources in 2014 the number of cruises based at a Chinese ‘home port’ grew by 9% y-o-y to 366, while another 100 cruises called at a Chinese port (up 41%).

So, the cruise sector once again seems to be in rapid expansion mode. This time, the question is whether the establishment of new Chinese brands, the deployment of vessels specifically designed for Chinese operation and further investment in Asian cruise ports could drive a more sustained phase of ship investment. Finding the answer will certainly make for an interesting itinerary. Bon voyage!

As in the case of most areas of shipbuilding, the contracting boom of the mid-2000s allowed Chinese shipyards to gain market share in the OSV sector. Initially, however, this was limited to relatively simple units. More recently, Chinese yards have begun to construct more sophisticated vessels, with broader global appeal. At the same time, they have grown market share (53% of the OSV orderbook, versus 36% in 2008).

AHTS Demand Dries Up

Back in the boom years, although Chinese yards took many orders, the majority of these were from Asian owners for use in the benign waters of the East. Asian-designed ‘commodity’ AHTSs of around 5,150 bhp made up the bulk (55%) of these orders. Chinese yards were assisted in gaining a market share by
build-to-stock intermediaries, such as MAC, Coastal or Nam Cheong, which outsourced orders to Chinese yards with the prior intention of resale close to delivery. Meanwhile, European owners tended to restrict their ordering to established yards, for instance those in Norway, whose designs they knew and trusted.

In Asia, working for NOCs like Petronas, Pertamina and PTTEP, whose operations are mostly near-shore, these small OSVs could find a market. But both Chinese yards (keen to diversify their product mix) and Asian owners (keen to expand their business into new geographies) had an incentive to change approach.

PSV Purchasing

In an effort to climb the value chain, Chinese yards began to licence OSV designs from European companies, such as Rolls-Royce, or Ulstein for example. Subsequent ordering of such designs has been focussed on larger PSVs – in 2013, 82% of orders for Chinese built PSVs 4,000+ dwt had European designs. Demand for these vessels outpaced that for AHTSs, as more deepwater and far-from-shore fields entered development, with PSVs being the vessel of choice for these remote operations. The yards’ previous (Asian) clients transferred their attention to these vessel types, keen to gain a slice of the action in areas like the North Sea, or West Africa. At the same time, non-Asian owners were encouraged to order at yards now offering designs which they recognised, at prices 20-30% lower than those offered by European shipyards. Between the start of 2010 and 2014, China’s OSV orderbook rose nearly fivefold, to 382 units (53% market share).

Future Demand

Of course, the trend towards China can only last if the vessels which they deliver meet with acceptance in the Atlantic oil producing regions. However, the signs are encouraging, with Chinese built vessels making up a large proportion of deliveries into internationally operated areas (33% in 2013). Of all Asian-built PSVs with European designs currently active, around 30% are employed in West Africa, whilst 30% of PSVs >3,000 dwt are working in NW Europe.

This is an evolving situation, which will become clearer as the large PSV orderbook delivers. For the time being, however, Chinese yards look to have risen to the challenge of becoming builders of OSVs attractive for global operations.